Vultures, Some With Funny Accents, Circle Commercial Real Estate

Commercial real estate may be in serious trouble this year, and many high-flying deals for trophy properties may be crashing to the ground, but investors are eager to scavenge the wreckage - and that's good news for the rest of us.

More than half of the foreign investors polled by the Association of Foreign Investors in Real Estate (AFIRE) think that the U.S. is the best place in the world to invest in real estate for capital appreciation. The U.S. is a perennial investor favorite, but the percentage of respondents citing the U.S. this year was the highest since 2003. The Investors say they plan to increase U.S. allocations above 2009 levels by 62 percent for equity and 83 percent for debt, according to the survey.

Also, commercial property investors that stayed away in 2009 are expected to return to the market in 2010, bringing as much as $75 billion dedicated to buying up "distressed properties," according to analysis by Real Capital Analytics.

And a good thing, too. These investors seem to be lining up to catch a falling knife - lessening the chance that the chaos cutting into commercial real estate will hurt the rest of us.Analysts now predict that the default rate for commercial real estate loans that sold as bonds could reach 9 percent this year, as lenders seize or restructure the debt on properties like troubled office towers and empty hotels.

Many of these deals are in trouble because investors paid too much during the bubble. At Stuyvesant Town and Peter Cooper Village in New York, it turns out that income from rents isn't enough to pay the mortgage. Other properties were financed with big loans that are now reaching the end of their terms, and the balance due may be more than the property is worth. Then there are the scores of just-finished empty condo buildings being repackaged as rental apartments that are worth less than their construction loans.

All in all, a lot of fat-cat property owners are about to loose their buildings. (Donald Trump? You're fired!) The only reason we care is that we really don't want their pain to hurt the rest of the economy and stall our wobbling recovery.

In particular, a lot of small, regional banks made loans for commercial buildings, and we don't want them to go down with the developers. The economy may be slowly recovering, however, "that doesn't mean we're through with the bank failure business," says John Levy, founder of John B. Levy & Company. "I see problems in areas from Arizona to Florida and California to Michigan, and the reasons can vary from cars to condos."

Overall, lenders recovered a weighted average of 59 percent of the value of the commercial real estate loans they liquidated in 2009, before costs and fees, according to Real Capital Analytics. That's not great, though it's significantly better than the recovery rate for foreclosed home loans.

Fortunately, property investors like the foreigners polled by AFIRE seem to be lining up to bid for some of these commercial buildings -- with the depressed prices and the relative strength of their currencies, foreigners see bargains. That means that when banks are forced to seize an apartment complex, they are more likely to to have someone to unload the property on, which will limit their losses and the damage for the rest of us.

"The worst of the value declines is likely over," says Moody"s Managing Director Nick Levidy. Prices for commercial properties actually rose 1 percent in November, according to Moody"s/REAL Commercial Property Price Indices, after falling at a rate of more than 5 percent a month in the middle of 2009.